Budget phones don’t cut it anymore in China – and that’s bad news for new brands

In the early days of a company like Xiaomi, just being a Chinese smartphone startup was enough to build hype and sell phones. But a half-decade later, the Chinese smartphone market is practically overflowing with domestic competitors, and Xiaomi seems to be struggling. And while that’s arguably due in part to some poor decisions – like its new gigantic phone – I don’t envy the choices Xiaomi, or any Chinese smartphone company, has to make in the current market.

When it comes to deciding what your product strategy is going to be, there are really only four options, and none of them look appealing.

1. Build low-cost, high-quality phones

This is the approach Xiaomi has been taking to this point, and it’s become essentially the default approach for most of China’s domestic smartphone makers. Meizu, LeEco, Vivo, and a host of smaller brands are all taking this approach too, offering phones with good performance that typically fall in the US$230 to US$380 price range. Xiaomi’s new Max phone, for example, costs between US$230 and US$307, depending on storage options.

But there are two problems with continuing in this approach. The first is that the market is increasingly crowded. In that “sweet spot” US$230 to US$380 price range, Alibaba’s Tmall offers 1,200 different options. Even on JD there are over a thousand handsets for sale in the US$150 to US$444 price range. Granted these aren’t all totally distinct models, as phones with different storage sizes or accessory packages are often listed separately. But of course, these sites also don’t count competing phones that are sold through other channels, like exclusively on the company’s site (which used to be Xiaomi’s model) or only in retail stores. Any way you slice it, competition in this sector is tough.

The other problem, as my colleague Steven recently pointed out, is that consumer interest in this sector is drying up. The average phone purchase price in China rose to US$319 last year, up from US$260 in 2014, according to Canalys. Chinese consumers are moving upmarket, which means committing to this low-price, high-performance strategy may be a losing bet in the long run.

2. Going upmarket

The obvious response, of course, is for Chinese companies to try to follow those consumers upmarket. But that’s not going to be easy either. Upmarket, China’s smartphone startups have to try to compete with the global sharks like Samsung and Apple, as well as with the super-established Chinese giants like Huawei.

As much as China’s smartphone startups like to talk about taking on Apple, it’s something none of them have really tried to do. A year ago, I wrote that all the “Apple” talk is mostly a PR tactic Chinese firms use to attract media attention, and that remains true today. If you raise your prices to compete with Apple, that means you’ve got to try to fight Apple on things like branding.

That’s really difficult, because Apple is a foreign company that still has some luxury associations in China. Customers who want a status-symbol phone are still going to buy an iPhone. And customers who just want a high-end phone in general are going to be most inclined to buy from Apple, Samsung, or Huawei – all giant companies that most startups, including Xiaomi, would have a tough time matching with marketing.

I’m not saying it would be impossible, of course. With the right branding and a clever marketing campaign, a Chinese smartphone startup might really be able to swim upstream and take some market share from the global sharks at the top of that food chain. But it won’t be easy or cheap.

3. Do something unique

It’s no longer possible to set yourself apart with a low price for high performance, and it’s tough to compete with the likes of Apple, so another possible approach is to try to create a phone that stands out in some way.

This may be the most attractive approach, and it’s probably what Xiaomi is going for with its new Max, which sets itself apart from the crowd by being absolutely humongous. Whether that will work is an open question though. For this approach to work, the unique selling point also has to be something that consumers actually want. And with so many players currently in the market, what are the chances of coming up with a unique twist on the smartphone that hasn’t been done before and is something that users want? Rather low, I’d say.

4. Go abroad

The final option is to eschew the Chinese market, or at least de-emphasize it, and instead focus on a developing market like India where there might be less competition and more room for growth. Many of China’s smartphone startups – including the aforementioned Xiaomi, Vivo, LeEco, and Meizu – are already doing this. But of course, going abroad poses its own set of challenges too.